# AC curve

Economists classify production funtions as possessing constanct, decreasing, or increasing returns to scale. Yet, from a cause and effect point of view, it is not readily apparent why decreasing returns to scale should ever exist. That is, if we duplicate an activity we ought to get duplicate results. Hence, if we truly duplicate all of the inputs, we ought to get double the output. Can you reconcile the apparent contradiction between this logic and the expectation of the economist that beyond certain output ranges firms will confront decreasing returns to scale?

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Decreasing returns to scale are technological conditions under which a given percentage increase in all the firm's inputs results in the firm's output increasing by a smaller percentage. In the Figure, moving from x2 to x3, the production function is concave, so that by doubling inputs we less than double output. One possible justification is that the size of production has overstretched itself. The advantages of specialization are being outweighed by the disadvantages of managerial ...

#### Solution Summary

Decreasing returns to scale are examined.

Average and Marginal Costs Curves

To solve this exercise I have to use the results of the exercises solved in the document attached.

Assume that the demand curve has the form of D = 7500/p.

Without congestion the p equals the average costs of road traffic and D is the volume of traffic.

Draw the average and marginal costs curves as well as demand curve into the same graph (you have derived the functions in the previous exercise).

Determine the optimal level of traffic q* visually from the graph and then mathematically check your solution.

What toll should be collected from the road users in order to achieve the optimal use of road capacity?

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